According to Bank of America Merrill Lynch analysts, this isn't
the end of the good news for Raytheon, or for the rest of the
defense industry. In fact, this kind of good news comes around
only every four years.

In a note outlining its optimism on Raytheon, BAML brought up
research it conducted a few months ago finding that defense
stocks beat the market during presidential elections.

"Defense outperformed the S&P 500 in seven of the last nine
presidential-election years since 1980," the note said, "with an
average return of 17.2% versus 4.3% for the S&P 500."

The reason is the nature of how the companies make money.
"Defense firms rely so heavily on contracts and funding from the
federal government, so their earnings and performance are more
closely tied to political changes rather than market forces," the
note said.

During the most recent presidential-election year, 2012, the
stocks of the defense companies tracked by BAML — Raytheon, L-3
Communications, Northrop Grumman, Lockheed Martin, Huntington
Ingalls, and General Dynamics — grew an average 19.1%, compared
with 13.4% for the S&P 500.

In some presidential years the difference can be massive. In
2000, defense stocks beat the S&P by 44.7%, and in four
presidential years tracked by BAML — 1980, 1992, 2000, and 2008 —
the difference was at least 10%.

Additionally, even midterm years are good for defense companies.
"Defense outperformed the S&P 500 in 12 of the last 18
election years since 1980, with an average return of 12.6% versus
5.6% for the S&P 500," BAML said.

Defense stocks should take off next
year.Wikimedia
Commons

The note also projected that these companies should have a vested
interest in the outcome.

Based on BAML's evaluation of congressional role calls and other
data, a victory by a Republican nominee will have much bigger
benefits for defense investments and in turn their earnings. "Our
analysis shows that the best-case scenario for defense in FY19 is
a Republican president with a FY16-FY19 [compound annual growth
rate] of 8.4%," the note said in respect to the growth in federal
defense investments.

If a Democrat wins the White House, BAML expects a growth rate of
only 2.8% per year.

According to the International Institute for Strategic Studies,
the
US spent $581 billion on defense last year, which accounted
for 36% of all defense spending in the world. The budget,
however, has been declining since 2011, when the US spent $695
billion, according to the BAML research.

The report did warn, however, that in the year after elections
defense stocks fell back to earth. "Defense underperformed the
S&P 500 in nine of the last 17 post-election years since
1980, with an average return of 12.6% versus 14.7% for the
S&P 500," BAML said. That included five of the nine
post-presidential-election years.

If history is any guide, it's a good time for investors to jump
into defense stocks before the presidential race, and their
prices, really takes off.